CalPERS' chief investment officer on Monday raised the possibility of the Sacramento-based pension fund severely cutting its $25.9 billion private equity portfolio because issues of fee transparency by general partners are becoming a major controversy.

CIO Ted Eliopoulos told the system's investment committee that public comments at meetings and media stories criticizing the private equity program are part of CalPERS being a public agency.

"But the sustained and repetitive attention on our staff and our private equity investment strategy is taking a toll on both our staff and competitiveness in the marketplace," he said.

He said the issue will be discussed at the $323.9 billion fund's retreat meeting on July 17 as the system sets its asset allocation for 2018 through 2021.

"If we are not successful in finding a better solution, the asset allocation process will need to weigh a much-reduced allocation to private equity than would have otherwise hoped for," he said.

The California Public Employees' Retirement System was thrown into a national debate about private equity fees in 2015 when officials disclosed they could not account for how much they paid in performance fees to private equity general partners. The pension fund has since started making such disclosures, but CalPERS officials admit they don't have a handle of all fees being charged, which they blame on the private equity industry.

Mr. Eliopoulos said CalPERS has been a "leader" in fee transparency and said other major pension funds that also make large investments in private equity have not seen the attacks that CalPERS has received.

Mr. Eliopoulos told the investment committee that any major changes to the private equity portfolio could takes years to implement and would come at a major cost to the system.

He said CalPERS' capital market assumptions for the next decade shows that private equity is the only asset class with more than an expected 7% annualized return, at 8.3%.

Mr. Eliopoulos said a large reduction in the private equity program would make it difficult for CalPERS to maintains its expected rate of return of 7% going forward.

A CalPERS insider, who asked not be identified, said ultimately it would be unlikely for CalPERS to make a major reduction in its private equity program.

Some smaller reductions may be inevitable, however.

The private equity program is 8.1% of CalPERS' total portfolio, but has been shrinking over the last few years because the pension fund cannot find enough funds to invest in. Just five years ago, CalPERS had more than $34 billion invested in private equity funds.

Mr. Eliopoulos said Monday that CalPERS may be forced to reduce the size of the program even more. He said more and more institutional investors are competing for the limited number of top-grade private equity investment opportunities.